Analyst July-03

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Swiss Private Banking
Redefining Business Models
Value Chain
With products and transaction settlements becoming a commodity,
providers of private banking services need to redefine their strategic
positioning.
– Bernhard Koye, Ph.D.
Program Director, Swiss Banking School,
MD Zurich Wealth Forum.
P
roviders of private banking ser
vices act as information interme
diaries. In the information age,
their previous information advantage is
eroding with important business areas
such as products and transaction settlements becoming a commodity. Therefore, providers face the pressure to redefine their strategic positioning at the
beginning of the 21st century. Swiss private banking still has a highly fragmented market structure. As the sector
is very important to Switzerland, the
transformation potential of the leadingedge business models in the information age is being intensively discussed
today. The strategic tool is the ‘Business
Model’—a concept which consists of the
analysis of the value chain, the core com-
petencies and the network positioning.
Overall, the industrialization of private
banking will continue in the years to
come. This will offer opportunities for
countries with qualified personnel and
an attractive salary level (e.g., for India
and other countries in the region) to attract parts of the value chain of Swiss
private banking providers.
Business models: Focusing on the
core competencies within the value
chain
The value chain in private banking is being disaggregated step-by-step into the
areas of ‘customer advice’, ‘product offering’ and ‘transaction settlement’.
Transaction settlement is a scalable business. Here, a higher rate of re-
turn becomes possible if more transactions are being processed. As transaction settlement becomes a commodity,
margins have already faced erosion over
the past years. Therefore, different players aim to enlarge the volume through
insourcing of other banks (e.g., the UBS
AG with a project called ‘Bank for
Banks’ or smaller providers such as
Märki Baumann as well as actual
transaction banks such as the
‘Xchanging European Transaction
Bank’). Many providers consider
outsourcing very attractive in this area.
As IT is a crucial factor in this field,
outsourcing corporations with providers
in the Asian region can offer very attractive conditions and high quality solutions.
In the product offering area, clients
also understand more about the banking products and demand an open architecture. Therefore, margins are also under pressure. Classical funds products
equally face the demand of cost transparency these days. For the moment,
structured products and hedge funds
still allow interesting margins, but specialized providers of best-in-class products in the near future might well proChartered Financial Analyst
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duce standardized products. So far, a lot
of providers try to sell their own products and will continue to do so as long as
the margins are interesting, but one has
to bear in mind that more and more financial products are becoming commodities. Some providers of structured
products and hedge funds have been
able to build up a core competence,
structuring sophisticated financial
products and are, therefore, able to increase or at least maintain the product
margins.
The most important component for
the success of each business model is
customer behavior. Some years ago, results of the industrial innovation research suggested a radical behavior
change in the private banking industry.
The argument was based on the recognition that the customers could reduce
their informational disadvantage significantly due to the information available on the Internet and would, therefore, force margins to come down. However, this development did not occurred
radically. Several initiatives of new
business models of online banks in
Switzerland did not succeed as they did
not attract enough customers. So far,
adaptive strategies on the basis of existing business models have proved to be
successful. The Swiss Banking Institute
of the University of Zurich conducts periodical analysis of the behavior of Swiss
investors and can, therefore, gauge the
variation quickly. It was found that customer behavior is adapting step-by-step
over time. The number of investors in
the Swiss private banking customer
segment which use the Internet both to
gather information and to trade on the
stock exchanges climbed from 13% in
the year 2000 to 41% in the year 2004.
This share is significantly larger than in
the segment of the affluent or retail
banking. The theory that the classic private banking customers do not belong to
the typical online investors seems not to
be confirmed here.
Therefore, in the area of customer
advice, it is important to note that due
to the improved information access, customers will only be willing to pay for integrated solutions. Due to the very limited scalability of the relationship man2
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agers (after a 10-hour-day, a relationship manager can no longer meet clients, so for business expansion, new personnel will have to be recruited), the
market is open for niche positioning.
Success will depend on the capacity to
offer advice, which is perceived as value
adding from the customer. A possibility
for customer-focused small-scale providers is to achieve the know-how on the
advising processes thoroughly by thirdparty providers. In Switzerland, for example, Bank Wegelin and Bank Linth
recently announced such cooperation.
Bank Linth focuses on regional customer interface, whereas all other advice-process-components
are
outsourced to Bank Wegelin.
This development will force private
banking providers to add more valueadded services for the customer who will
be less and less willing to pay high margins for pure information delivery. One
can assume that private banking clients
will not become uniformly online traders. But nevertheless the question is
whether the clients would be willing to
pay a margin which includes a remuneration for the relationship manager
as well as for the brand of the financial
institution or will they, over a period of
time, look for providers who offer firstclass advice for less margin such as independent financial consultant who
then structure the whole value chain
more cost-efficient for the clients. In the
US, providers like ‘Focused Financial
Planning Inc.’ have been offering this
business model successfully since a long
time. But there also exist about 6,000
independent financial consultants in
Switzerland and in the information age
this business model could be the threat
of the future for existing institutions.
The main challenge is, therefore, to adjust to the gradually changing customer
behavior. More competition for customer relations, higher customer knowledge and the resulting increased customer expectations require an increased
differentiated service offering, tailored
solutions to the different customer
needs and segments. The improvement
of knowledge of the relationship managers is, therefore, absolutely necessary as
it can be expected that margins will
come down over time and customers will
only be willing to pay for integrated
problem solutions.
Zurich wealth forum as a platform
to discuss the consequence of these
developments – business excellence
meets science excellence
Knowledge is the key to mastering the
innovation process in private banking in
the information age. What remains unchanged is the need to ensure that
knowledge gained through research,
learning and experience does not undermine the traditional core skills, which
will continue to be indispensable in the
future as well. Therefore, the Zurich
Wealth Forum was set up as a leading
platform for businesses and universities to share information and ideas on
future-oriented areas of wealth management.
The Zurich Forum brings together
experts from the scientific and business
community with a view to help shape
the future of wealth management. On
top of the presentations and discussions, the forum provides an opportunity for participants to cultivate personal contacts and share information
and ideas. The renowned Swiss Banking School and the foundation of the
major Swiss banks provide the forum
for highest-level executive education.
The University of Zurich provides facilities for this purpose for the full duration
of the forum. An evening social event is
also organized where participants will
have further opportunity to foster personal contacts.
The forum provides for plenary discussions with key speakers addressing
important strategic issues on the one
hand, and workshops where participants have the opportunity to examine
and discuss specific topics in greater detail, on the other. In the workshops,
which are run in parallel, scientists expound on recent research findings while
practitioners present business solutions and concepts relating to the subjects in question. A key aim of the forum
is to promote dialog between the business and scientific communities, and by
so doing, lend fresh impetus to both sectors. Wishing to represent an interna-
Swiss Private Banking
tional perspective, the forum is conducted in English.
Competition: Network positioning
The once conservative financial sector is
in a state of transition. What would
have been unthinkable 20 years ago is
now commonplace. Lagging slightly behind other banking segments, private
banking or wealth management is now
also in the throes of a radical transformation. However, the greatest challenges lie not in the immediate future
but in the medium- to long-term. The
restructuring of the sector is still ongoing. Forces underlying the transformation are information technology, advances in scientific research, de-regulation and re-regulation. Among the service providers this has led to heightened
competition, faster innovations in products and processes, and market globalization.
Changes in the financial sector have
been accompanied by changes among
clients. Today’s private clients have individual and heterogeneous financial
needs. They are more discerning and
better informed about financial matters
than ever, and have an understanding of
the relationship between income, risk
and cost. They have the choice among an
array of offerings by the asset management industry and can select from a
large and diverse range of products and
services. And they are aware of their
power in terms of demand as a consumer.
Value chains will, therefore, disintegrate within the medium-term due to
the increasing margin pressure. Multiple cooperation models can be observed in all three areas in the market
already. If you follow this business logic,
the expected concentration and consolidation process will not develop through
large mergers of entire banking institutes, but rather toward the outsourcing
or the sale of single parts of the valueadded chain, with which economies of
scale are essential. All providers have
to analyze their own strengths and
weaknesses to position themselves. The
key question will be which partner will
be in the focal position to control the distribution of the margin between the network partners in the future. While larger
providers preferably strive for the roll of
the focal provider in a network, for
smaller providers the search for their
niche position and equivalent
outsourcing partners appears to be the
most meaningful option. Doing that,
they can keep their independence also in
long-term focusing on their advisor
model.
Until recently, all three value disciplines—customer advice, product creation and transaction settlement—
were furnished through each provider
independently. It is questionable
whether this business model can be
maintained. Two basic alternatives to
shape the future business model are
open to providers:
• Hold adherence to the integrated business model: Established providers can try for a certain
time to maintain the previous business models without opening new
developments. This model is known
in innovation research as ‘Burst of
Improvement’ and often leads to a
situation where the opportunity to
adapt proactively to the occurring
change will be missed. The consequence can be a disappearance from
the market. The delegating group of
customers will stay large enough for
some more years. Therefore, the
classical integrated private banking
business model can be maintained
for some years. As a consequence,
profits will come down over time as
less and less clients will accept this
model as well as the high margins
which are also a consequence of the
lack of use of the potential efficiency
gains of the information age.
• Modularize the value chain: The
changes towards a modular value
chain seem to be unavoidable in the
long run as informed customers will
begin to bring the margins down and
providers, therefore, will be forced to
adapt their business models and
process structures. Keeping that in
mind, it must be assured that the
management culture remains conducive to adopt tthe long-term, the
medium-term as well as the shortterm developments of the business
models. Developments and changes
of customer behavior have to be observed exactly and outsourcing possibilities have to be analyzed and
implemented.
The limiting factor of the technologically possible developments in private
banking is the individual customer with
his limited reception capacity. The precious resource ‘time’ is being used individually according to subjective customer preferences. Only if the perceived
utility of a new business model is higher
than the utility of the previous model, a
change will be taken into consideration.
The information-based services of private banking consist not only in providing information, but also on information
processing with the use of implicit
knowledge. Hence, it is the capacity to
offer structured advice on complex problems that offer the best possibilities in
the future. Long-term success depends
especially on the readiness of the providers to offer the customer, under consideration of its limited rationality, the additional value that will be then perceived
as such by the client. Ongoing education
of relationship managers is a key to success as future clients will only be willing
to pay for value-added advice and products they really need.
Reference # 01M-2005-12-00-00
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